In­ter­view of the Month

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Saudi Oil Min­is­ter Khalid A. Al-Falih was in New Delhi last month. In a free­wheel­ing dis­cus­sion he talks of is­sues rang­ing from oil prices to en­gage­ments with In­dia. BS: Do you see the need for ex­tend­ing the out­put curb be­yond 2018? Khalid A: The 24 coun­tries' com­mit­ment is to bring the mar­ket to bal­ance. Bring­ing the mar­ket to bal­ance and sta­bi­lize the mar­ket is multi-faceted, it in­volves in­ven­to­ries, but in­ven­to­ries are also quite a broad cat­e­gory. There are OECD in­ven­to­ries, there're nonOECD in­ven­to­ries, there is a match­ing for OECD in­ven­to­ries to de­mand, mak­ing sure that all the cus­tomers of crude oil find the type of crude oil they want, at the lo­ca­tion they want. So, that study is tak­ing place and once we know ex­actly what the bal­anc­ing of mar­ket will en­tail, we will an­nounce what is the next step. The next step may be eas­ing of the pro­duc­tion con­straints. My es­ti­ma­tion is that it will hap­pen some­time in 2019, but we don't know when and we don't know how. What we know is that it's go­ing to be done in a way that it will not in any way dis­turb the bal­ance and undo the hard work since 2016. So, our com­mit­ment to a bal­anced mar­ket is be­yond the deal, to con­tinue to guide our pol­icy go­ing for­ward and that will mean that af­ter this pro­duc­tion con­straint agree­ment that was ex­tended in Novem­ber to last through 2018, there will be a new frame­work to help us keep the mar­ket bal­anced. I think ev­ery­body has learnt pro­duc­ers as well as con­sumers that a mar­ket with­out a steer­ing wheel is very de­struc­tive, very dam­ag­ing to the in­ter­est of all and created not only losses to pro­duc­ers, but it also hurt the in­ter­est of con­sumers. It hurt the in­ter­est of the oil and gas ser­vice in­dus­tries. We saw jobs be­ing lost. We saw neg­a­tive im­pact on the macro econ­omy glob­ally over the re­duced de­mand by oil pro­duc­ers. So, we don't want to go through this again. This is the con­sen­sus we are hear­ing from around the world and will be back to In­dia in April in the IEF and we will have on the same ta­ble rep­re­sen­ta­tion from con­sumer coun­tries and we will be lis­ten­ing as pro­duc­ers to make sure that we con­tinue to pri­or­i­tize their in­ter­ests and our in­ter­est of long-term de­mand and sta­bil­ity of the mar­kets. And the frame­work be­yond 2018 is yet to be de­ter­mined, but for sure from the Saudi and from the OPEC stand­point, there is a deter­mi­na­tion to trans­late the suc­cess of 2017 and 2018 par­tial as it may be into a last­ing frame­work that al­lows us to avoid in­sta­bil­ity in the oil mar­kets. I think what we want is an evergreen frame­work that brings pro­duc­ers from OPEC and non-OPEC to­gether in a mar­ket mon­i­tor­ing fash­ion that al­lows us to take quick de­ci­sions. You can­not pre­dict what 2020 is go­ing to bring. You can­not even pre­dict what the sec­ond half of 2018 will have. We have seen re­peat­edly that the fi­nan­cial cri­sis have se­vere im­pact on oil mar­kets, we have seen that nat­u­ral dis­as­ters, po­lit­i­cal in­sta­bil­ity may cre­ate dis­rup­tions on the sup­ply side. So, both sup­ply and de­mand have vari­ables that no­body can pre­dict on a FATIATE ba­sis. Events hap­pen and we need to be ready. When I talk of a frame­work, I talk about a method­ol­ogy and a com­mit­ment that

should events re­quire ac­tion to sta­bi­lize mar­kets that pro­duc­ers are will­ing and able and au­tho­rize, the gov­ern­ments are com­mit­ted to get to­gether and take that ac­tion. BS: Rus­sia join­ing OPEC? Khalid A: I can­not speak for Rus­sia and what they are will­ing or not will­ing to do. I think OPEC has proven to be a very use­ful tool for meet­ing a very im­por­tant ob­jec­tive for the global en­ergy mar­kets, and there­fore for the global econ­omy. And Rus­sia will make its deter­mi­na­tion on how to work with OPEC, I know there has been and con­tin­ues to be an ac­tive Rus­si­aOPEC di­a­logue, I hap­pened to be in Moscow a few months ago when that ses­sion took place and I ad­dressed the di­a­logue. As a min­i­mum, that will con­tinue, we wel­come Rus­sia el­e­vat­ing its co­op­er­a­tion with OPEC. What I'm talk­ing about the frame­work is some­thing above OPEC and above the method­ol­ogy which is just to make sure that ma­jor pro­duc­ers who have over 50% of global pro­duc­tion and sig­nif­i­cantly more of the traded oil across board is con­trolled by the 24 coun­tries that we are talk­ing about. These coun­tries have their in­ter­est and the in­ter­est of their cus­tomers at heart, we need to con­tinue to ste­ward the sta­bil­ity of the mar­ket and we will do that through this. BS: Are you con­cerned about ris­ing oil pro­duc­tion in the U.S.? Also what will be the tim­ing of the Saudi Aramco IPO? Khalid A: The ris­ing pro­duc­tion in the U.S. is wel­come. Over the last 3 years we have about 5 mil­lion bar­rels of ca­pac­ity in­crease. If you look at US rise over these last 3 years be­tween the de­cline we saw in 2015-16 and the rise since then is less than a mil­lion bar­rels. So, a mil­lion com­pared to 5 it fades and in the mean­time we've seen sig­nif­i­cant de­clines in coun­tries like Venezuela, Mex­ico. So, the mar­ket has been able to ab­sorb that pro­duc­tion. Go­ing for­ward, I think more of that same trends will con­tinue Peo­ple are al­ready talk­ing about 2018 de­mand be­ing way in ex­cess of the 1.5-1.6 we saw in 2017. We will see what de­mand brings. In the mean­time the struc­tural de­ple­tion and de­cline in some of the world's large pro­duc­ing basins is a re­al­ity that will con­tinue. Some of it can be mit­i­gated with in­creased in­vest­ments with bet­ter mar­ket con­di­tions, but it can­not be stopped. So, we need new pro­duc­tion to re­place and I think if you put U.S. pro­duc­tion in global con­text, it's quite wel­come. It just hap­pens to be light sweet and many of the world's re­finer­ies are built for heav­ier and more sour crude slate. So, it may not really meet in­creased uti­liza­tion of ex­ist­ing re­finer­ies. It will take time for the re­fin­ing in­dus­try to re­con­fig­ure it­self to take more of the sweeter crudes com­ing out of the U.S. So, when you look at these trends set­tle and look at the macro pic­ture be­fore over-re­act­ing to one small sliver of the oil sup­ply chain, which is the U.S. pro­duc­tion. In the mean­time, that's why we need to be ag­ile, we need to work to­gether, we need pro­duc­ers to con­tinue co­op­er­at­ing. The JMMC will meet in April in Saudi Ara­bia and we will look at the trends then, and fore­cast, give our ad­vise to the min­is­te­rial meet­ing which will take place in June in Vi­enna. In the mean­time, let's just stay steady as we go, con­tinue dis­ci­pline is my mes­sage to my col­leagues. We cer­tainly ex­er­cise it in Saudi Ara­bia. We just an­nounced that March we've cut our pro­duc­tion and we are keep­ing our ex­ports be­low 7m. This is the soft de­mand sea­son and we are very con­scious of this. So, we are able to re­duce fur­ther. It was in­ter­est­ing to see the U.S. in­ven­to­ries go­ing down in this past week in Fe­bru­ary. Both API and EIA data show crude draws, which shows that the strat­egy is work­ing. The dis­ci­pline in Jan­uary was ex­cep­tional as you saw from the re­ports com­ing out of the JMMC. So, I think we are on plan on track and all lights are green as they say as we im­ple­ment our strat­egy. We are com­mit­ted to meet­ing our com­mit­ment on the pro­duc­tion con­straints. We will bal­ance our do­mes­tic and an ex­port as time goes. But as I said we are go­ing through a soft spot on global de­mand. And we are con­scious of this. Some­times we take ex­tra­or­di­nary steps that may not be nec­es­sar­ily ap­pli­ca­ble for the en­tire 12 month du­ra­tion of 2018. So, we will see what the next 3 quar­ters bring. We have set our pro­duc­tion for the first quar­ter and if you look at the en­tire first quar­ter, we are once again well be­low the pro­duc­tion cap that we com­mit­ted. &7m bbls is for March, but it matches for Jan­uary and Fe­bru­ary. BS: IPO by Saudi Aramco? Khalid A: Well, all I could tell about the IPO is that we are com­mit­ted to the IPO. It will take place. It's good for the king­dom, it's good for Aramco and it's good for global oil in­dus­try. And we will an­nounce the de­tails of the list­ing venues and ex­act tim­ing in due course. BS: Will crude prices will be an in­di­ca­tor? Khalid A: It's one of the most com­plex, one of the largest events in fi­nan­cial his­tory. As you imag­ine the gov­ern­ment is look­ing at mul­ti­ple fac­tors to op­ti­mise the in­ter­ests, not only for the king­dom, not only for the com­pany, but also for the global fi­nan­cial mar­kets. So, tim­ing will be an­nounced, and I hope ev­ery­body is pa­tient as those de­lib­er­a­tions take place. BS: Saudi los­ing grip in In­dia crude mar­ket? Khalid A: For us we feel quite com­fort­able, quite at home in In­dia do­ing busi­ness, and again that goes back to the re­la­tion­ship be­tween the two peo­ple be­fore even the mod­ern Saudi Ara­bia and In­dia were created as na­tion states. Our val­ues, peo­ple-to-peo­ple re­la­tion­ships makes do­ing busi­ness in In­dia quite nat­u­ral for us. An­other level is the com­pli­men­ta­r­ity be­tween the 2 coun­tries, the 2 economies. Many of things that are pro­duced in Saudi Ara­bia are needed in In­dia and vice-versa. So, as I come in my ca­pac­ity to­day as min­is­ter of en­ergy and in­dus­try, I'm not only look­ing for oil and en­ergy part­ner­ships, but also petro­chem­i­cals, fer­til­iz­ers, power projects in In­dia that are of at­trac­tion to the cham­pi­ons of those fields in Saudi Ara­bia. On the other hand, In­dia is grow­ing at the fastest rates in the G-20, and it is one of the top 8 economies to­day. So we want to ce­ment the ties and cap­ture those emerg­ing op­por­tu­ni­ties in­clud­ing In­dia be­com­ing a big in­vestor in Saudi Ara­bia as well as find­ing op­por­tu­ni­ties for In­dian ex­ports and the Make in In­dia strat­egy of Prime Min­is­ter Modi to lever­age the mid­dle-East largest econ­omy and the an­chor of our re­gion with Saudi Ara­bia. So, all of these were dis­cussed. I had the plea­sure and hon­our of meet­ing with Prime Min­is­ter Modi for an hour yes­ter­day, lis­ten­ing to his wis­dom, his guid­ance on how the re­la­tion­ship should go. Of course, I also car­ried with me mes­sages from cus­to­dian of the two mosques King Sal­man about his in­ter­est and his com­mit­ment to tak­ing the re­la­tion­ship to a truly strate­gic level and build­ing on the suc­cess of PM Modi's visit to Riyadh

in 2016. His Royal High­ness Prince Mo­hamud­din Sal­man fol­lows up on our suc­cess and work­ing on the re­la­tion­ship with In­dia al­most on a weekly ba­sis. We are build­ing the frame­work for a strate­gic re­la­tion­ship that is mul­ti­fac­eted. Oil is an im­por­tant com­po­nent, but it's not the only thing. You will be amazed that in my dis­cus­sions with the Prime Min­is­ter, re­new­ables and power took more time than oil. Agri­cul­ture took more time than oil as well as the broad re­la­tion­ships. Po­lit­i­cal, se­cu­rity, eco­nom­ics, in­vest­ment, cre­at­ing in­vest­ment ve­hi­cles be­tween the 2 coun­tries. So, it's really a bright fu­ture for Saudi Ara­bia and In­dia. I think the 2 coun­tries can cre­ate and al­liance of sorts to bring sta­bil­ity also, be­cause bring eco­nomic well-be­ing to In­dia to help its re­gion and the same thing to Saudi Ara­bia. Mid­dle East needs sta­bil­ity and a strong, thriv­ing Saudi Ara­bia on the eco­nomic side will bring sta­bil­ity to the mid­dle-east. And for­tu­nately we know that in­sta­bil­ity in the south asia re­gion where In­dia is the clear an­chor can spell into the mid­dle-east and vice-versa. So, you can't sep­a­rate the po­lit­i­cal and the se­cu­rity from the eco­nom­ics. Both coun­tries have vi­sion­ary lead­ers that are look­ing to sta­bi­lize our re­gional eco sys­tem but at the same time fo­cussing on the in­ter­nal economies of our coun­tries and driv­ing them into the new economies of the fu­ture. Co­op­er­a­tion on all fronts is key. Com­ing back to oil, we are not both­ered by short-term fluc­tu­a­tions of volumes. We've seen re­fin­ers re­act to buy op­por­tu­ni­ties that they get from time to time. But at the end of the day we know from 8 decades of sup­ply­ing the world with en­ergy that our part­ners will find the value in long term sta­bil­ity. Sta­bil­ity of the volumes be­ing there, sta­bil­ity of the qual­ity be­ing there, and pre­dictabil­ity on what the sup­plier and in this case Saudi Aramco is com­mit­ted to. So, to­gether with me is a strong del­e­ga­tion from Saudi Aramco that met with their cus­tomers here to ce­ment the sup­plier re­la­tion­ship. Saudi Aramco con­trols about 25% of the high qual­ity con­ven­tional oil re­serves and if you look at the global re­serve base, there are start and they are not really com­pet­i­tive with what Saudi Aramco is of­fer­ing. The ge­og­ra­phy and be­ing able to de­liver oil to In­dia and the broad slate of grades that Aramco of­fers, that is five grades, is un­matched by any other sup­pli­ers. So, I think ul­ti­mately that will pre­vail in terms of the long-term trend. We are not look­ing at In­dia as 4 mil­lion mar­ket, we are think­ing of In­dia as an 8 mil­lion bar­rels a day mar­ket with the high growth rate that we are see­ing and the num­ber of re­finer­ies be­ing built. So, the fo­cus is not short at our foot­steps, we are fo­cussing on miles down the line as we run to­gether with the In­dian in­dus­try to­wards meet­ing the en­ergy needs of the 1.3 bil­lion peo­ple that are fast join­ing the mid­dle class. I would say specif­i­cally we spent 99% of our dis­cus­sions on oil talk­ing about fu­ture projects. In fact I don't re­call talk­ing to any­body about volumes in 2017 ver­sus 2016 ver­sus 2018. That is a very tac­ti­cal is­sue that the com­pa­nies can talk. What I'm here to ad­vance our long-term com­mit­ments, both as my hat as min­is­ter and hat as chair­man of Saudi Aramco that we want to be part of the land­scape. This morn­ing we had a one hour meet­ing about the com­mit­ment of Aramco to the 1.2 mil­lion bar­rels per day west coast re­fin­ery. Agree­ments have been al­ready signed that al­lows dis­cus­sions to start on the con­fig­u­ra­tion of the re­fin­ery, on de­sign ba­sis and pre-fea­si­bil­ity stud­ies. So, that dis­cus­sion is on­go­ing. I left the meet­ing to talk to you and be­yond this, Aramco is also look­ing at other op­por­tu­ni­ties to buy into ex­ist­ing re­finer­ies in In­dia as well as up­grades of ex­ist­ing re­finer­ies. So, there are at least 3 dif­fer­ent tracks which I can­not re­veal more specifics. One is the green­field west coast re­fin­ery, which is al­ready pub­lic, but there are dis­cus­sions with ex­pan­sions as well as buy­ing stake into ma­jor ex­ist­ing re­fin­ery as­sets. All of these are il­lus­trated com­mit­ments by the King­dom and the com­pany to be not only a sup­plier, but an in­vestor in In­dia at an un­matched scale. And In­dia is open for part­ner­ship, open for busi­ness, we wel­come that, we wel­come Prime Min­is­ter Modi's probusi­ness en­vi­ron­ment, we be­lieve in it, we be­lieve it's here to stay and have told Aramco team to as­sign zero po­lit­i­cal and reg­u­la­tory risk to In­dia and treat it as part of Saudi Ara­bia. The projects will have risks, the mar­kets will have risk, but In­dia has no risk. And we are here to invest, we are here to grow, we are here to be part of In­dia's land­scape and we will be re­ceived with open arms and we don't take that for granted. We will match that with com­mit­ment, with ac­tion and with un­matched flow of FDI. BS: Are you mir­ror­ing the strat­egy you have adapted in rest of Asia, like when you buy a stake you lock in some kind of sup­ply agree­ment as well? Khalid A: Ab­so­lutely. In­dia doesn't need our char­ity. In­dia is a rich coun­try and is get­ting richer by the day by ca­pa­bil­i­ties and the re­sources of In­dia. And a good part of work­ing with In­dia and In­di­ans is that they un­der­stand the prin­ci­ples of busi­ness and there will be no wind­fall out of this that is not nor­mal, but at the same time these in­vest­ments have to be bank­able. And at the same time we have found around the world that if you lock in the crude slate and match it from the reser­voir all the way and bring that sta­bil­ity in re­fin­ing ba­sis and you don't fluc­tu­ate and change your crude diet, that trans­lates into sig­nif­i­cant dol­lars in the long-term. For the re­fin­ery it­self, re­gard­less of its own­ers, we have re­finer­ies around the world that we are try­ing to wind them off the Saudi crude and they refuse. We have a re­fin­ery in Asia that is run­ning 100% on Saudi crude, S-Oil. We are ask­ing them to re­lease some of the Saudi crude. We are ask­ing them why don't you take 65% of Saudi crude and buy some of the avail­able crude op­por­tunis­ti­cally. But they are say­ing 'no'. The re­fin­ery is ad­dicted to Saudi crude and refuse to take a sin­gle bar­rel from the open mar­ket. And it's the most prof­itable in Korea. So, I think that speaks to it­self. U.S. re­finer­ies are ex­tremely prof­itable once they run steadily on a crude diet that they can pre­dict. So, noth­ing is go­ing to be run on 100% crude in In­dia, at least that's not our de­sire. But we need to know what to build the re­finer­ies for. Our crude if you look at the spec­i­fi­ca­tions from 8 years ago to to­day, be­cause of the size of the reser­voirs man­aged by Aramco, pre­dictable within a frac­tion of 1% in terms of its grav­ity and con­tent and so on and so forth. So, it makes re­fin­ing it more prof­itable to the en­tity. So, that value is brought into the coun­try, pre­dictabil­ity and high qual­ity and of course com­pet­i­tive pric­ing by Aramco and pre­dictable pric­ing. So, that trans­lates into value.

Saudi Oil Min­is­ter Khalid A. Al-Falih

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